MORE INSURANCE GOES TO TOWNEBANK

Feature Article - Summer 2009 | By Andrew Singer

TOWNEBANK (Hampton Roads, VA), a community bank with 17 branches and $3.3 billion in assets, manages one of the nation's fastest growing bank insurance operations.

The bank reported $15 million in gross insurance revenues in 2008, up from $10.85 million in 2007. It expects revenues to reach $20 million by 2011.

Gary McMahan, Towne Insurance

Before 2005, TowneBank had a "nice little [insurance] business," but they decided that they could grow it significantly larger—both through acquisition and organic growth. They separated the P/C and employee benefits operations. They figured this would lead to "better focus," particularly on the benefits side, McMahan told us.

Growing pre-tax profits

Not just revenues but profits, too, have swelled. In 2005, Towne Insurance generated $500,000 in pre-tax income (including the benefits business). This year, pre-tax profits should come in at about $3 million. By 2011, they are expected to reach $4 million in pre-tax income, says McMahan.

As the business grows from $15 million to $20 million in revenues, most (60-70 percent) of its new business is expected to come from the P/C side, says McMahan. Much of that new growth (60 percent) will be through acquisition, but organic growth (40 percent) will also be substantial, according to his projections.

Profit margins in the insurance business hover at about 20 percent, higher than traditional bank profit margins, notes McMahan, another reason the company is attracted to insurance brokerage.

McMahan was asked how the institution has been able to sustain such high cross-selling ratios. Private bankers and commercial lenders are given insurance referral goals, just as they are for mortgage banking and real estate brokerage, he explains.

The company, too, has done a good job "removing fear" of insurance. A bank lender typically says, "I don't want the guys in P/C to screw up my client relationships." TowneBank has struggled to change that attitude. "We're overcoming it," says McMahan, who acknowledges that this is a work in progress. They strive to make their private bankers and commercial lenders feel that "the [client] relationship is going to be enhanced" by bringing in insurance.

A key to making the whole thing work, in McMahan's view, is for the insurance producer "to understand who the customer is and stick with that customer," although it's more accurate to speak of customers (plural) in this case. An insurance producer really has two clients, one internal and one external, i.e., the bank lender and the ultimate customer. Both need to be cultivated.

A bank lender typically says, 'I don't want the guys in P/C to screw up my client relationships.' TowneBank has struggled to change that attitude. 'We're overcoming it.'

—Gary McMahan, Towne Insurance

This means 'thank you' notes when lenders make referrals, and it means keeping them apprised about developments, such as when a referral leads to a client meeting or a sale. These sorts of professional "courtesies" are critical, in McMahan's view.

An emphasis on fee income

G. Robert Aston, Jr., TowneBank's founder, chairman and CEO, is a BB&T veteran. When he started the Virginia bank in 2000, he brought with him the BB&T business model with its emphasis on fee income. Indeed, the bank's goal is to draw 50 percent of revenues from nonbank (fee income) sources, according to James P. Bradner, president of Towne Insurance (Chesapeake, VA), the P/C subsidiary.

The bank's first acquisition was a mortgage company. Its second, in 2001, was an insurance agency. TowneBank also owns a real estate agency, two title insurance companies, a travel insurance agency, and a property management company that rents out high-end residential properties on the beaches of the Outer Banks area.

The bank purchased Bradner's own insurance agency in July 2001 and a second agency that same year.

Two and a half years ago TowneBank bought TFA Benefits, the employee benefits firm, which has both a wholesale and retail benefits business. Jack Frieden, the firm's owner, remains president of TFA Benefits (Virginia Beach, VA).

Both Bradner and Frieden report to Gary McMahan, who is not an employee of TowneBank but is President & CEO of Professional Advisory Resources, LLC, a separate firm. McMahan has been in the insurance business for 38 years and is the former president and chief operating officer of Nationwide Provident, a Nationwide Financial company.

Integrating insurance within the bank

Back in 2001, one of insurance executives' first challenges was to find a way to integrate insurance into the bank, recalls Bradner. First they had to convince the bankers that "we knew what we were doing." Bankers typically don't know much about insurance, nor do insurance people know much about banking.

Their initial plan was to match up bankers and brokers. A broker would be assigned to each commercial lender. That force-fed approach didn't work, though. There were often personality conflicts and other problems.

Next, they tried placing personal lines and commercial lines producers in bank locations. This worked much better. The producers met with bankers, socialized, discussed business; they often found they had a lot in common. Relationships were established, recalls Bradner.

Posting P/C insurance producers in bank branches was one critical 'turning point' in the program's evolution.

—James Bradner, Towne Insurance

Today, when a banker brings a new customer into the branch, that customer is often introduced to the branch-based insurance producer in case that customer has unmet insurance needs. When a customer opens a checking account, the banker often asks, 'Would you like a quote on your homeowners policy?' That is relatively easy to do when the personal lines rep is right on hand.

The bank, too, has made insurance referrals a goal of most everyone who works in the organization. Those who excel at cross-selling become members of the Chairman's Club. This isn't just for referrals to the insurance subsidiary, but also for deposits, mortgages, real estate, etc.

"Everyone has a goal," explains Bradner: Private bankers, commercial lenders, branch managers, customer service representatives, and others. "We get a lot of leads from private banking," with their doctors, lawyers, and small business clients.

They reset the formula every year. Bradner's producers, for their part, can earn their way into the Chairman's Club by referring clients back to the bank for DDAs (demand deposit accounts) and other products.

In the past, Chairman Club members were eligible for trips. There are no trips this year, but there is still recognition. "It's prestigious," says Bradner. Recipients can print the Chairman's Club designation on their business cards. There are also small bonuses.

Bradner has 22 producers in the P/C operation; 14 of them specialize in commercial lines, eight in personal lines. About half of his producers operate in bank branches (both commercial and personal lines producers).

Each city has its own bank president. Most presidents want an insurance presence in their city, and producers work to serve their customers' insurance needs. Producers typically have a stand-alone office within the branch. They are considered to be part of the branch team. They attend bank marketing meetings, for instance.

About 70 percent of P/C revenues are from commercial lines, 30 percent from personal lines. That's a good mix in Bradner's view, though he wouldn't mind if it migrated toward 40/60 (personal/commercial).

"We're in a coastal area, so personal lines placement is often more difficult," says Bradner. There may be "wind" issues with houses in the Outer Banks on the Atlantic Ocean, say.

Towne Insurance doesn't have many million-dollar insurance accounts. They do have numbers of $50,000 insurance accounts, though. Small businesses are their niche; most accounts are $100,000 or lower.

Given the recession, Towne Insurance did relatively well in the first half of 2009. Revenues were off only 3 percent compared with the same period in the previous year, says Bradner.

"We're writing a lot of new business," he says, but a major challenge is to "keep our customers in business," helping them to cut their expenses, wherever possible. This can cut into the agency's own income in the short term. Bradner is hoping that by the end of the year the economy will be rebounding.

He anticipates growth in 2010. "We've bottomed out" regarding the soft insurance market," says Bradner, and insurance premiums should start rising again. Also, the national economy should be reviving, which will help Towne Insurance, as it will other businesses. Bradner's agency's revenues are tied to a large extent to client company payrolls; they are dependent on things like the number of automobiles in a client company.

TFA, the employee benefits unit, was acquired by the bank two-and-a-half years ago, the result of an "innocent conversation that snowballed," recalls Frieden. He was talking with McMahan. McMahan asked him about his personal business-exit strategy. Frieden, in his mid-50s, had a long-term exit strategy, but really had not considered the shorter term. The conversation evolved, Frieden recalled, and soon became a conversation about TFA's "growth strategy," about opportunities to grow the business, including organic growth.

Insurance and banking have an important element in common, notes Frieden: Both are relationship businesses. By becoming part of TowneBank, Frieden had an opportunity to capitalize on a number of key bank relationships. Before joining the institution, he never "realized the power of those relationships" and their ability to provide a steady source of new business.

TowneBank makes commercial loans to small- to medium-size businesses mostly. That had also been TFA Benefits' client niche. In that sense, "it was a natural fit." Both organizations had deep roots in the community. TFA began in 1928.

"They had relationships that we didn't have," recalls Frieden. It was a relatively "easy transition" to talk with bank customers.

TowneBank's private banking segment has been "tremendously successful" in referring employee benefits prospects, as has the commercial lending group. Sometimes it takes nothing more than a phone call. Other times the private banker (a relationship manager who works with high net worth bank clients) or commercial banker will tell the TFA rep to "meet us" at a certain place and time with a customer who is dissatisfied with his current group health plan. Almost all TFA's clients are businesses with fewer than 750 employees. The business might take six months to a year to develop, but Frieden's group is patient.

TFA, the employee benefits unit, was acquired by the bank two-and-a-half years ago, the result of an 'innocent conversation that snowballed.'

—Jack Frieden, TFA Benefits

Health insurance, not surprisingly, is TFA's core product, but these days, "Just about every broker is representing the same companies," notes Frieden, so TFA has worked hard to add "value-added services," things like employee benefits websites and online enrollment, often at no cost or a reduced cost to the customer.

Frieden estimates that bank referrals are bringing TFA 50 new corporate clients a year. TFA's retail business has about 1,000 clients, so the bank is now accounting for 5 percent of new business measured by client number. (The percentage by revenues is considerably higher; about 30 percent, according to McMahan.)

One big question mark, however, is health care reform. That could change things significantly. Frieden is keeping a "keen eye" on developments in Washington, DC.

The general economy has had an impact on the employee benefits business, too, slowing growth. Gross revenues are up 5 percent for the year, which isn't bad, but Frieden had expected them to rise about 9 percent. That is growth, nonetheless—and it is all organic; none is through acquisition—at a time when many businesses are contracting. They might still reach 8-9 percent by the end of the year, Frieden adds. The problem is not people (clients) dropping health insurance, it's that payrolls are down. Auto dealerships and real estate brokerage firms, among others, are cutting employees.

Benefits is usually part of the P/C agency, at least in most bank insurance operations, notes McMahan. TowneBank put them in separate subsidiaries to bring more attention to the benefits side. Bankers, too, like this arrangement. They prefer to think that they are dealing with specialists when they refer business.

As noted, there is some concern about the future of the benefits business pending the outcome of health insurance reform. Health insurance typically accounts for some 80 percent of benefits revenues. Group life and group disability insurance are relatively minor contributors. What TFA Benefits principally does is health insurance for small businesses. Still, whatever the outcome of health care reform, companies will still need advice about health insurance, Frieden figures, so there will remain a market for their services.

Towne Insurance Chairman McMahan was asked which of the two businesses—P/C or employee benefits—was the faster growing one. Once they get past the 'soft' market, the P/C business should grow more strongly, he answered.

Overall, TowneBank likes insurance for a number of reasons, says McMahan. It provides cross-selling opportunities. It offers another product by which the institution can bind the customer to the bank; the more products a bank sells a customer, the 'stickier' is the relationship, after all, and the less likely the customer is to leave the bank.

Also, insurance has "annuitive" value. The business acts like an annuity for the bank, providing income through good years and bad, even in a 'soft' insurance market like the present. They've been able to make money in the soft market (marked by lower premiums) by seizing a "bigger part of the pie," says McMahan.

It helps, too, if the producers can be based in the bank branches. Technology has made this more feasible. Producers don't have to be sitting beside account managers in large offices as was often the case in the past. (The account manager typically manages the producer's business.) Email and the paperless workplace offer flexibility. When the morning mail arrives, for example, it can be opened in agency headquarters and scanned into the computer system. A client letter to a producer can be forwarded that same morning to the producer at his/her bank branch location.

Indeed, posting producers in the branches was one key 'turning point' in the program's evolution, in Bradner's view.

Asked about the key to integrating insurance at a bank, Bradner answers: "The top guy has to buy into it and force it down through the organization." You also have to get the producers and bankers to get along, he adds

Andrew Singer is editor-in-chief and publisher of Bank Insurance & Securities Marketing magazine. He can be reached at asinger@bisanet.org